I own an S- corporation. I sued on behalf of myself and the S-corporation to collect income that would have been taxable (to the S-corp and me) (The case was for breach of contract of a consulting agreement, software license and a non-compete agreement) if I had won the suit. I lost the suit.
There is no doubt that it would have been taxable income to me if I had won the suit. The issue is whether “attempting to produce or collect taxable income" really means you must actually collect the income. NY State is taking the position that the line on page 193 of Pub. 17 In the section Other Expenses (Line 23) q. To produce or collect income that must be included in your gross income. superceded the line on page 194 and that if you did not actually produce and collect the income but merely sued in an attempt to produce and collect the income it is not deductible.
This leads to the next question. I claimed it as a misc deduction as I paid the fees from my personal account since the S-corporation is inactive. If the misc deduction is disallowed since I lost the suit and no taxable income was received could I now file an S-corp return and generate a loss. This would be the only activity of the S-corp.
There is no doubt that it would have been taxable income to me if I had won the suit. The issue is whether “attempting to produce or collect taxable income" really means you must actually collect the income. NY State is taking the position that the line on page 193 of Pub. 17 In the section Other Expenses (Line 23) q. To produce or collect income that must be included in your gross income. superceded the line on page 194 and that if you did not actually produce and collect the income but merely sued in an attempt to produce and collect the income it is not deductible.
This leads to the next question. I claimed it as a misc deduction as I paid the fees from my personal account since the S-corporation is inactive. If the misc deduction is disallowed since I lost the suit and no taxable income was received could I now file an S-corp return and generate a loss. This would be the only activity of the S-corp.